JVLV: CHINA'S ECONOMIC TSUNAMI AND DONALD'S McDONALD'S DINNER, By Jiri and Leni Friedman Valentam, 8-27-15

Ah well-a day! What evil looks had I from old and young!

Instead of a cross, the Albatross around my neck was hung.

-- Samuel Taylor Coleridge 

The August 24, 2015 largest one day decline of the Shanghai Composite index, since 2007  is  already engraved in Chinese history as “Black Monday.” Moreover, the Chinese tsunami hitting the world’s second largest economy, is  coming to our own shores and the ship of state faces a hard landing. Why, and what is behind this tsunami?  Or remembering poet Coleridge’s Ancient Mariner, what kind of bird has China shot that  is  hanging around its neck?

Sadly,   the diagnoses   of our president’s staff and our presidential candidates indicate they have no clue – not even, Donald Trump.  Until recently, he maintained that while our leaders are” stupid” the Chinese leaders are cunning.  Now, with the tsunami hitting the Chinese coast, he has concluded the cunning Chinese leaders will take both themselves and our “stupid” leaders down. 

What neither our Federal Reserve nor the White House, nor our presidential candidates understand is that the root cause of the financial tsunami -- the albatross – is China’s Communist party.     In the uneven transcendence from communism to post-communism, market forces are indeed in place.  So are hundreds if not thousands of brilliant Chinese brains around government computers: many of them educated at the Wharton School of Economics or at Berkley.  But the party and state machinery of China are still set up around vertical power, and the perceived need to manipulate and control the market.  And the market insists on being free!

  For the last several days Chinese officials have put their best fingers in the dyke with acceptable measures that the Federal Reserve uses as well.  They have devalued their currency, lowered minimum reserves for banks and even cut interest rates. But as Coleridge penned,

“Water water all around and all the boards did shrink; Water water all around and not a drop to drink.”   What they also do that we don’t is to force their fund managers to buy stocks, telling them what to buy and when. 

Chinese leaders are not just disciples of John Maynard Keynes, but also of Sun Szu, Lenin and Mao. They put a premium on the notion that “all warfare {military, but also political and economic} is based on deception.” Thus, we can trust their figures on growth, unemployment and indebtedness, even far less than those of Obama’s acolytes. We agree with Trump that our own unemployment figures are much higher than what we are told, but the Chinese figures are higher still.  Their   indebtedness   is likely as great, if not greater, than ours.

As during the 1989-91   transcendence of communism to post-communism in Eastern Europe and Russia, the communist state manipulation and indirect control of the market and currency has proven incompatible with a market economy.  In 1989, Beijing responded to the calls for liberty and coming privatization of the peaceful eastern European and Russian revolutions with preemptive repression -- the   Tiananmen Square massacre.  Since then, they have relied on presumably more sophisticated, compute-r based, Keynesian state interventionism, gross market manipulations, and deception, including stealing our government and corporate secrets through hackers. 

But the chickens have finally come home to roost. Math and computer skills, combined with sophisticated cunning, can only control the invisible hand of the market for so long.   A full transcendence to a market economy for China is essential.  Adam Smith, Friedrich Hayek and Milton Friedman.  Not just John Maynard Keynes.

A first step for the Chinese leadership and their people should be to read   Hayek above all, but also our U.S. Constitution.  There can be no rational economic decision-making without personal freedom and liberty.  The Chinese disorder, and possible coming of a new Tiananmen Square, can only delay the inevitable. But economic success goes hand in hand with personal liberty as demonstrated by historian Richard Pipes.

And what should we do now?  We should certainly not, as presidential candidate Scott Walker suggests, cancel the visit of Chinese president Xi Jinping in September.   Just as former Secretary of State, George Schultz provided a sort of Economics 101 course on the capitalist market economy to Mikhail Gorbachev during the Reagan administration, the visit should be turned into a working session for Xi.  There,  perhaps, while eating a double-size hamburger  rather than a seven-course White House banquet,  as Trump proposed, our two best living economists,  Arthur Laffer and  Larry Summers, should explain to Xi Jinping that genuine market forces cannot be forever under the Party’s secret control.  

Walker himself will hopefully stop making foolish suggestions and be invited to the McDonald fest.  Why not. He’s a very good budget cutter, and could bring along his Wisconsin pal Congressman Paul Ryan.  In fact, they could lecture both presidents,   Xi and Obama, about the albatross of indebtedness and orthodoxy of relying on fiscal stimulus.  

Finally, democratic socialist Bernie Sanders should also be invited.  The Vermont senator, who shares with Trump an aversion to hedge fund managers, and would likewise like to tax the richest one percent, might learn   that state market capitalism and socialist utopia is at the brink in China.  Central planning, even enlightened socialism, is incompatible with a market economy.  Barack Obama’s “socialist leaning,” i.e. introducing well-meant but poorly designed and executed radical reforms like Obamacare and subsidizing illegal immigrants via sanctuary cities and social security, are projects destined to fail since they are not backed by sound economics. 

Nor will the turn to socialism, even of the democratic kind, solve our problems here.  What will benefit us is to limit our own Federal Reserve from manipulating the market.   While we lecture the Chinese,  let us put our own house in order. The forthcoming Republican presidential debate in Cleveland should be a good place to address this issue.   As Ronald Reagan opined, “Socialism only works in two places, Heaven where they don’t need it, and hell where they already have it.”

BIOS

A graduate of the Prague School of Economics, Jiri also studied political economics at the University of Berne, Switzerland.  He holds a Ph.D. from Johns Hopkins University in International Relations. Dr. Jiri Valenta is president of the Institute of Post-Communist Studies and Terrorism.  He is the author of the  seminal study, Soviet Intervention in Czechoslovakia 1968, Anatomy of a Decision, Baltimore, Johns Hopkins University Press, 1991, with a preface by Alexander Dubcek. The book has been translated into Chinese, Russian and Czech. 

Jiri  is also the author and co-editor of Soviet Decision-making for National Security, Eurocommunism between East and West and other books.  Dr. Valenta was invited twice in the past to lecture at the Chinese Academy of Science.  He has also lectured in Japan, Taiwan, Singapore, Thailand, Malaysia, Indonesia and the Philippines, as well as Australia, and  throughout Europe and Africa. 

Valenta’s  articles have been published in Foreign Policy, Survival, Problems of Communism, Studies in Comparative Communism, Political Science Quarterly, Washington Journal, Orbis and  others.   Newspapers are not limited to the New York Times, Washington Times, and Baltimore Sun, Times (London) El Pais (Madrid), News, Argumenti i Fakty, (Moscow) and more.  A member of the Council on Foreign Relations, and  recipient of several distinguished fellowships, he also holds the Jan Masaryk medal from Czech Republic for “promoting relations between the Czech Republic and the United States of America.”   His work been featured in  Time, and Washington Magazine and he has appeared on CBS and ABC News and the McNeil Lehrer report.

Playwright and painter Leni Friedman Valenta, a graduate of Brandeis University and the Yale School of Drama (playwriting), is editor and co-writer of  jvlv.net, a unique website featuring post-communist studies, conflicts and terrorism.  A former Democratic Party official in New Jersey, she has been a contributor to The National Interest, the Miami Herald, Aspen Review (Prague) the Kyiv Post, Georgian Messenger (Tbilisi), Tico Times (Costa Rica) and is a regular blogger with Jiri at RIAC, Moscow.  She is also completing with Jiri  a major study, Russia’s Democratic Revolution.